How China Can Succeed in the M&A World

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Rule No. 1: Know which approach works best for you—and don't assume that conventional M&A is your only option.

Companies often learn the ropes by forming partnerships and joint ventures in foreign markets. That approach gives them crucial insights and experience via a relatively modest financial commitment. Advantages include using a partner's manufacturing facilities, piggy-backing off their already well-established brands, and accessing sales and distribution networks and talent.

The challenge is to know why you want a partner, what the winning scenarios are for both companies, and how to tackle the cross-cultural challenges. Haier (600690:CH), now a leading global white-goods manufacturer, is learning how to use partnerships with such U.S. players as General Electric (GE:US) for joint product development. It reciprocates by providing regional access in the Chinese market through Haier's distribution partners.

Rule No. 2: Know why you're acquiring. Understand the basis of competition and then create an investment thesis.

One of the best ways to avoid disastrous acquisitions is to articulate why buying a business will make your company more valuable. When we surveyed successful acquirers, we found that about 80 percent of fruitful transactions were based on a clear investment thesis; with failed deals, it was about 40 percent. Too often, companies failed to pinpoint the best opportunities for value creation or assess risks. A winning acquisition strengthens a company's basis of competition, such as its cost position, brand strength, and customer access and loyalty. All were goals in Lenovo's (992:HK) 2005 acquisition of IBM's (IBM:US) PC division, which helped the buyer achieve global scale, build a global brand, and gain access to leading-edge technology.

Rule No. 3: Know which deals you should close. Ask and answer the few questions that test your investment thesis.

Identifying potential acquisition targets and winnowing them to one or two best choices requires discipline. Instead of hastily reacting to acquisition targets as they come on the market, seasoned dealmakers know their basis of competition and are constantly thinking about the types of deals they should pursue. Their M&A teams create a pipeline of priority targets, each with a customized investment thesis, and then cultivate a relationship with each one. As a result, they can quickly close a deal. Because they know what they want to achieve with the acquisition, they're often willing to pay a premium or act faster than rivals.

Rule No. 4: Know where you need to integrate first and get at the key sources of value quickly.

Our research shows that cross-border deals carry a rate of success similar to that of domestic deals, but that integration typically is more complex. The unique challenges include tailoring the integration thesis to each region's circumstances, tackling actual and perceived cultural differences, and considering geographically dispersed operations and stakeholders, as well as complex legal and regulatory requirements that can derail the integration. To boost the odds of success, acquirers need to identify the best sources of synergies. They must ensure that the integration process isn't overly complex and they need to be able to make decisions quickly so critical milestones aren't missed.

Understanding whether deals are to boost "scope" or "scale" is vital. Chinese apparel maker Youngor Group's (600177:CH) $120 million acquisition in 2008 of the Smart Shirts business of Kellwood in Chesterfield, Mo., is largely a scale deal, designed to expand a core business, as opposed to a scope deal, aimed at expanding into adjacent lines of business.

Scope deals require a different approach to integration than scale deals, with the goal of fostering some of the capabilities of the acquired company and integrating where it matters most, rather than combining similar companies for maximum efficiency. For example, ChemChina's 2006 acquisition of Adisseo improved the Chinese company's manufacturing capacity for the amino acid methionine, while its acquisition of the Rhodia unit upgraded its silicone business.

Rule No. 5: Know what to do if the deal goes off track. Set up an early warning system and act quickly.

No deal goes exactly as planned. The best dealmakers install early-warning systems to detect problems, then tackle them as soon as they emerge. They distinguish between inevitable glitches and those that signal more serious problems. Acquirers must take decisive action to put their deals back on track—or not. It's not clear that SAIC had a "Plan B" for Ssangyong when the acquisition turned sour.

Ultimately, to improve the odds of a successful global expansion, knowing when to pull out of a deal is no less critical than the other four guiding principles: knowing the best approach for your situation, knowing why you're acquiring, knowing the best deals to go after, and knowing where to integrate. The more Chinese companies look for growth overseas, the more they need to be guided by these principles.

Phil Leung is a partner in Bain & Co.'s Shanghai office and leads the firm's Greater China mergers and acquisitions practice. Larry Zhu is a partner in Bain's Shanghai office.

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